SCOTUS Grapples With Obamacare Subsidies Issue

(CN) - With Chief Justice John Roberts notably silent, party lines otherwise split the Supreme Court at a hearing Wednesday on the tax subsidies provision of the Affordable Care Act.

Upholding the challenge would cause approximately 7 million Americans in three dozen states to lose their health insurance subsidies. Many would be forced to pull out of the exchanges, driving up prices for the rest, and potentially causing the exchanges in those states to collapse.

The lawsuit, King v. Burwell, was filed by four Virginians who challenge a provision of health care reform that requires them to either buy insurance or pay a penalty.

David King and the other plaintiffs contend that four words in the Affordable Care Act - "established by the state" - mean that the tax subsidies were intended only for those who live states that have their own exchanges, not for those who buy insurance through a federal exchange.

They argue that the distinction was a deliberate choice by Congress to encourage state participation in the program.

Michael Carvin began his oral argument for the plaintiffs Wednesday by calling the case a straightforward one, "where the plain language of the statute dictates the result."

But Justice Elena Kagan quickly pointed out that "it's not the simple four or five words."

"It's the whole structure and context of the provision" that determines how the law should be interpreted, Kagan said.

Justice Anthony Kennedy, a key swing vote, told Carvin that his argument raised a "serious constitutional problem."

"If your argument is accepted, the states are being told either create your own exchange, or we'll send your insurance market into a death spiral," Kennedy said. "We'll have people pay mandated taxes which will not get any credit on the subsidies. The cost of insurance will be sky-high, but this is not coercion."

Justices Sonia Sotomayor and Stephen Breyer echoed this concern.

But Carvin told the court that the Medicaid statute imposes the same sort of conditions, where states must set up their own Medicaid system or lose access to federal money.

"Twenty-two states have said no to the Medicaid deal," Carvin said, referring to the ACA's optional expansion of Medicaid.

"That has created a bizarre anomaly in the law," such that indigent residents of some states do not have access to federal funds because their state turned down the money, he added.

The Supreme Court has upheld this law, and Carvin argued that tax subsidies under the ACA should be treated in the same manner, allowing the states to decide whether to accept federal funds. There is "not a scintilla of legislative history suggesting that without subsidies, there will be a death spiral," Carvin said.

The exchanges will still offer a valuable service as a one-stop shopping hub for insurance without subsidies, the attorney added.

Carvin denied claims from the three liberal justices that this argument contradicted one he made in 2012 when arguing against the act's individual-mandate provision.

Chief Judge Roberts had been the deciding vote on that issue, with the 5-4 court upholding the Affordable Care Act.

Roberts said nothing to indicate his view of the matter at oral arguments this morning.

The court's conservative wing led the questioning of Solicitor General Donald Verrilli, representing the government.

The solicitor general told the court that the plaintiffs' reading forces Health and Human Services "to establish rump exchanges that are doomed to fail."

"It makes a mockery of the statute's express status express textual promise of state flexibility," Verrilli added. "It precipitates the insurance market death spirals that the statutory findings specifically say the statute was designed to avoid, and of course it revokes the promise of affordable care for millions of Americans. That cannot be the statute that Congress intended."

Justice Antonin Scalia retorted, "Of course it could be." Then, he vacillated: "I mean it may not be the statute they intended. The question is where it's the statute that they wrote."

In briefing, the government used "term of art" to describe the challenged four-word phrase.

The challengers mocked this line in their reply brief. "It would certainly be convenient, for an agency seeking to rewrite a statute, if an English phrase can become a term of art on the government's mere say-so."

Scalia picked up this same issue in questioning. "If [the phrase] can only reasonably mean one thing, it will continue to mean that one thing even if it has untoward consequences for the rest of the statute," he said. "No?"

Justice Samuel Alito noted that "it's not too late for a state to establish an exchange if we were to adopt petitioners' interpretation of the statute."

Alito proposed staying the effects of such a decision so that subsidies would not be cut off until the end of this tax year.

But Verrilli reiterated that "it would make no sense, no sense for Congress to have provided for federal exchanges if, as Mr. Carvin suggest, the statutory design was support to result in every state establishing its exchange."

And if that was Congress' plan, "then the consequence for the states would be in neon lights in this statute," Carvin said.

"You would want to make absolutely sure that every state got the message," he added. "But instead what you have is a subclause in Section 36B, which is a provision that address the eligibility of individual taxpayers for taxing purposes."

Verrilli said the government's position was a "pro-federalism reading" designed to afford the states flexibility.

Justice Kennedy brought up the possibility of Chevron deference, named after a 1984 ruling giving deference to interpretation of the government agency charged with enforcing a law.

"If it's ambiguous, then we think about Chevron," Kennedy said. "But it seems to me a drastic step for us to say that the Department of Internal Revenue and its director can make this call one way or the other when there are, what, billions of dollars of subsidies involved here?"

Senate Minority Leader Harry Reid, along with House Democratic Leader Nancy Pelosi and other members of Congress, filed an amicus brief with the court stating that Congress intended tax subsidies to be available to all Americans, regardless of whether they purchased health insurance on a state- or federal-run exchange.

Six states - Oklahoma, Alabama, Georgia, Nebraska, South Carolina and West Virginia - filed an amicus brief siding with plaintiffs.

But 22 states with federally run exchanges claim they never interpreted the law as plaintiffs do, and to do so would exclude their residents from subsidies. Nine of these states have Republican governors.

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